Economics

Innovation

Government and the electric car

I'M TOOLING around Silicon Valley at the moment, participating in a few discussions on innovation. Since I've been out here, I've been thinking a bit about the prospects for electric car technology. The Bay Area might be the hybrid capital of the world, and Silicon Valley is the home base of Tesla Motors, an upstart competitor to Detroit and Japan in the race to build mass-market electric vehicles.

The trouble is that, to paraphrase a frequent judgment on Brazil, electric cars are the technology of the future and they always will be. Or at least that's how it often seems. In the past, the development of electric-vehicle technology has been stymied by unfortunately timed drops in the price of petrol. Now, as a post at Babbage explains, EVs are facing intense competition from rapidly improving petrol vehicles:

The petrol benchmark was chosen because in 2010—the most recent year for which data were available when the study was launched—the Environmental Protection Agency (EPA) fuel-economy figures for all compact cars sold that year averaged 27mpg. Given the huge improvements in fuel efficiency over the past few years, the average today is more like 35mpg. “In 2010, only one vehicle—the Smart ForTwo—achieved 40mpg,” notes Edmunds.com. “Today, the 40mpg club is up to nine vehicles and growing.” That is one of the reasons why pricey plug-ins such as the Nissan Leaf and Chevrolet Volt have flopped.

With America's new emissions standards requiring a fleet average of 34.1mpg by 2016, carmakers there have started peppering their line-ups with frugal imports from their overseas divisions. Some of the foreign fuel-sippers get even more to the gallon than popular hybrids like the Toyota Prius which, according to tests by Consumers Union, delivers a real-world 44mpg. With its advanced three-cylinder engine, Ford's new Fiesta, which went on sale in Europe last year, gets 47mpg (see “The balance of power”, March 23rd 2012). The Volkswagen three-cylinder up! is capable of 52mpg. Both could soon be heading for American shores.

Batteries remain very expensive to produce, and carmakers are actually quite good at squeezing ever more miles from conventional engines and hybrids when market conditions demand it. It seems quite possible, in fact, that enormous efficiency improvements in more traditional engines will keep full EVs a niche product until more fundamental changes occur in car markets. There might never be a day in which most, or even a meaningful minority, of the personal cars sitting in garages are fully electric.

Of course, things may not turn out that way. But the real possibility that they do should give us pause in thinking about how governments approach interventions in these sorts of markets.

One lesson is the tried and true aphorism that government isn't any good at picking winners. This isn't, by the way, a knock on government. No one is particularly good at picking winners. The problem for government is that while market-produced losers usually fail and go away, making room for winners, government-produced losers tend to stick around for a while, sucking resources away from potential winners. No one knows in advance whether something will work; government's failure is in its relative unwillingness to clear away the chaff.

That is the risk in something like a programme of generous tax credits for EVs. That sort of programme may develop a constituency which will rally to protect it, even after it seems clear that the credit isn't having the desired effect. And it is hard to see that it is. Some subset of consumers is clearly willing to pay a premium for EVs in order to make a statement; many of them would be willing to do so with or without a tax credit. Among marginal buyers, the most cost- and environmentally effective option might well be efficient conventional engines or hybrids—the growth of which options might be stunted by the tax advantages given to EV options. In the sort of common sense manner of thinking that we tend to see among sensible bureaucrats, EVs seem like the logical next step in automotive technology. But the logical next step is quite often not the next step, and markets excel at finding unconventional ways to tackle problems.

Is the answer, then, that government should stand back and let the market work? The answer there is clearly no. There is a legitimate cause for government intervention in these sorts of markets, based on market failures associated with negative pollution externalities. And so one obvious first step is to raise the tax on dirty fuels. A carbon tax obviously makes sense, as might an increase in the petrol tax. Governments could adopt such measures and give the market lots of leeway to figure out how to respond, much as markets have responded to rising market prices for petrol through a variety of mechanisms: higher fuel efficiency; more hybrids; more use of walking, biking, and transit; changes in living and commuting patterns; and so on.

Many economists will be tempted to leave matters there, but I suspect there's room for government to do more. Appropriate infrastructure investment is one possibility; over the course of decades, the government has invested quite heavily in infrastructure complementary to fossil-fuel technologies. That infrastructure provides scale benefits to fossil-fuel-based technologies that represents a barrier to entry for alternatives, and so the government should look at what sort of new investments might pass cost-benefit tests; upgraded grids seems like a good place to start.

New economics research is also revealing that there is path dependence in commercial research and development. Profit-maximising firms are much more likely to direct research-and-development funding toward improving existing research streams rather than embarking on new lines of research, for which they may have no initial advantage over new market entrants. As a result, the market will produce much more in the way of refinement of conventional engines, for instance, than in truly new research streams like EV powertrains. A carbon tax helps deal with this market failure, but economists are increasingly open to the idea that research subsidies might also be justified.

One simple way to go about that is to increase government funding for basic research in streams that could potentially have broad applications—like battery technology. There are likely to be significant knowledge spillovers from whatever is learned in such research, and there is less risk of creating and perpetuating white elephant programmes.

But what about something like Department of Energy loans or loan guarantees for companies trying to bring new, cutting-edge products to market? Tesla Motors received such a loan from DOE, and infamous solar company Solyndra took advantage of DOE loan guarantees before going bankrupt. One might argue that this is industrial policy plain and simple, that it's the government playing venture capitalist, and that there's no good reason for such interventions in any situation.

I don't know that that's correct. I can imagine circumstances in which it makes perfect economical sense to engage in these kinds of efforts, based on the market failures identified in economics literature. But you would want to see:

Very clear rules on how such support could be obtained, to reduce the odds of corruption;

Very clear rules on when such ventures would be allowed to expire; the biggest worry should not necessarily be that government will pick losers but that government will allow losers to stay afloat;

A price on carbon (or whatever negative externality the government is trying to address). It's going to be pretty inefficient to subsidise clean research and production without this, and with the price you gain a source of revenue to provide the research funding.

The really hard question is what one should recommend in a world of imperfect governments. In a perfect world, a government would only move forward after meeting the above conditions, but we don't live in a perfect world. Is the second-best solution to have government provide funding support in the absence of ideal conditions or to have the government do nothing? I don't know the answer. I'm not sure I know how to begin moving toward an answer. I'm very conscious of the immense waste (both environmental and economic) generated by poorly conceived programmes like ethanol subsidies.

This, to me, is the real problem with economists' approach to these issues. It's not, as some imagine, that economists are too dogmatic about the free market to tolerate government intervention in any case; that's clearly false. It's that economists aren't very good at generating theories of the second-best. And so many of us end up waving our hands and poo-poohing any government attempt to dip a toe into these waters without a particularly rigorous way of considering whether the dipping is good or bad.

Another way that government has caused the problem of pollution externalities is through local zoning laws. Zoning laws separate all of life's activities into very homogenous but distant clusters. As a result, Americans have to have cars to get do anything.

"Government isn't any good at picking winners. This isn't, by the way, a knock on government."

Then you go on to explain why the government is uniquely bad at picking winners.

I guess that isn't a knock on government if you a priori believe it shouldn't be in the business of picking winners. Like sucking at baseball isn't a knock on government. 'Cuz no one expects otherwise.

Unfortunately, folks like President Obama and your colleague M.S. believe trying to pick industrial winners is a great idea for government, especially in "clean tech."

So maybe we can agree that "government isn't any good at picking winners" is a knock on a vision of government held by some liberal-progressives.

"The problem for government is that while market-produced losers usually fail and go away, making room for winners, government-produced losers tend to stick around for a while, sucking resources away from potential winners. No one knows in advance whether something will work; government's failure is in its relative unwillingness to clear away the chaff."

This is one of the most insightful comments I've see in a long time. Thank you for posting it.

The electric car is a misguided wasteful failure lobbied for heavily by the coal industry. Natural gas is cheaper and cleaner than the coal fired power plants that charge electric cars. We have 200 years of natural gas right here in America. Its ridiculously inexpensive to convert current combustion engines to use natural gas. Its easier to distribute across long distances unlike electricity which dissipates during transmission and we already have all of the necessary infrastructure in place. Switching to natural gas would be a matter of burying some extra tanks at gas stations. Why are we not doing this?

If your ev benchmark is Leaf & Volt, then I can see this argument. But if you look at the performance & quality specs of the Tesla Model S, it's a new game. Model S beats nearly every high performance luxury sedan (or sportscar for that matter) on the road today.
Interesting that while EVs are evolving from low-performance golf carts to high performance sedans, ICE cars are going the opposite direction(3-cylinder toys) to improve their mileage numbers.

Did you buy your Leaf, or are you leasing it? If you bought it, it will likely take you 10 years to recoup your initial expenditure (and bear in mind that government subsidies are not "free" -- someone has to pay for it). The purchase cost doesn't go away, whether you pay it or someone pays it for you, and the break even point for most EVs is still several years. Even if you are renting your car, the purchase cost still has to be absorbed by someone -- just because it isn't you doesn't mean it is free.

And I know of a lot of electronic products that did not take off. My parents have a dust-covered Betamax to prove it.

You are full of it! Have you ever seen an electronic product that did not take off. What about the LCD Flat Screen TV or the Cell phone which in the beginning weighed 10 lbs. Get a grip the OIL companies hate the idea of an electric car. I have driven my Nissan Leaf for almost a year now. I laugh all the way to the bank it costs me 20 bucks on my electric bill to run. I am in the process of installing six small solar panels on my roof to charge the car so my cost will be zero dollars spent . Ten years from now you will be eating your words.

When economists approach these issues with a narrow ideological bias, based on narrow technical training that stops at the Hannity, Beck and O'Reilly mantra of "get the Government out of the way" then results will disappoint.

That "economists are too dogmatic about the free market to tolerate government intervention in any case" is a very ingrained problem in the USA and is prominent amongst US and US trained economists. Since the US was constituted early on by religious groups fleeing oppressive European governments and linked churches the antipathy of Americans to government is logical, but it limits the role that government can play, especially after Reagan and now that the conservative right is very vocal in US politics.

If orthodox US economists are not equipped to deal with "second best" (real world) solutions it is not a surprise (though people like Stiglitz, Rodrik, Sen, Krugman and others do well on some of these problems). That they then, under the World Bank, IMF, US Treasury, various Universities etc try to propagate that ideology in other countries as something "natural", no wonder these organisations cause so many major screw-ups. Structural adjustment means "get the government out of the way " which is really shit advice to feudal societies, plutocracies, corrupt countries, and to countries where government, the private sector and civil society constitute very effective institutions.

"It seems quite possible, in fact, that enormous efficiency improvements in more traditional engines will keep full EVs a niche product..."
They cannot get more efficient than Carnot Cycle allows; for the average car gasoline engine, about 25% to 30% and this happens when the engine is run/reved at its optimal thermal efficiency - 3/4 of rated engine power. However, when idling, thermal efficiency is zero.
Higher MPG is achieved by making the car lighter - and less comfortable.

A vehicle powered by such an engine will likely have an electric drivetrain, argumented by super-capacitors to improve acceleration and recapture energy through regenerative braking. At an efficiency level of 60%, it makes little sense to lug around a heavy battery. Generating electricity on-board is more economical, especially when you use the waste heat to run the A/C system.

The Wave Disk Generator looks pretty promising. 60% efficiency is as high as that of gas turbine generator. If realized, the huge improvement over ICE will kill off the prospect of battery-powered vehicles.

"And so many of us end up waving our hands and poo-poohing any government attempt to dip a toe into these waters without a particularly rigorous way of considering whether the dipping is good or bad."

Indeed. Economists need to learn to honestly scrutinize and predict whether or not a program will work from an unbiased, scientific standpoint instead of taking the position that it won't work and then trying to fit the facts to prove that position.

So do politicians, but expecting politicians to take this sort of approach is something I would not be caught doing.

The base Model S costs about $57 000. This is about the same as a BMW 5 series or Mercedes E class. You are referring to the $100 000 Tesla Roadster, which still costs Les than the Porsche 911 Turbo, but has much higher acceleration and better handling due to a lower center of gravity.

The government should stick with its day job, which it isn't very good at either. Mismanagement of public space in past decades is what created this culture of complete car dependency. Why are greens are dreaming of EV, after all? The truly green vehicle is the bicycle. For traveling within a city, the speed is certainly sufficient. Unless you're daredevil bicycle messenger though, it's really not a viable form of transportation because of the danger. Lack of dedicated lane is one problem. The biggest enemy to bicyclists though is curb-side parking. One absentminded driver opening his door without looking and you suffer serious, life-threatening injuries. The primary duty of government is balancing competing interests of private parties in the public sphere. It has clearly failed in this regard.

Let me get his straight, as I think this offers great insight as to the type of person who actually purchases an electrical vehicle. Youve purchased a ridiculously expensive crappy car known for catching on fire and are now going to install many thousands of dollars worth of solar panels on your roof, the manufacture of which actually produces more emissions than a hummer, and you are laughing maniacally all the way to the bank about saving money, even though it will take you 10+ years to recoup your expenditures, and by that time your car and solar panels probably wont even work and will at the very least be totally obsolete, and all that is only if on the way to the bank you arent consumed in a lithium ion fueled fireball of destruction. I think we get the picture now.

If businesses throw $ millions at a problem and fail, they die unless the government bails them out as it did GM and Chrysler.

But if the government wastes $ billions on a problem and fails, no one seems to care. At least they had good intentions. The pols who wasted the money go on to get re-elected and find more clever ways to waste money.

Before advocating more state money thrown at research, everyone should check out the history of the dept of energy. Carter created it to fund research and it has been nothing but a colossal waste of money.

The government has spent billions on battery technology and we got the Volt. Most money spent by the government on research is a waste. Jimmy Carter created the DOE to fund research into alternative energy and it has been nothing but a colossal waste. Throwing piles money at a problem can't overcome the physics and economics.